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Weak demand, competitive intensity delaying price hikes in RACs

* Voltas’ Q3 performance was a mixed bag, with UCP segment’s revenue outperformance being offset by a big miss in projects segment. UCP margins contracted by a higher-thanestimated 298bps yoy. The projects segment’s margins rose 494bps/444bps yoy/qoq.

* While the RAC industry’s volumes fell 5% in Oct-Nov, volumes of Voltas dipped 4%. The company’s RAC value growth was 9% in Q3. Its market share stood at 25.8% YTD till Nov’21, up marginally from FY21. Volt-Bek’s losses widened to Rs320mn.

* RAC demand in Jan remained muted due to extended winters, but management expects rebound in the ensuing months. Weak demand and competitive intensity restricted price increases, and as a result, management is cautious about raising prices in Q4 as well.

* We cut FY22-24E revenue/EBITDA by 6-9% due to weak order inflows in the projects business. We lower our UCP margin assumptions for FY22-23 and anticipate higher losses from Volt-Beko. Retain Hold with a revised SoTP-based Mar’23E TP of Rs1,150.

* Mixed bag revenue print; Volt-Bek’s losses widen: Revenue declined 10% yoy, in line with our estimate. However, segment-wise, Q3 performance was a mixed bag compared to estimates. UCP revenues beat our expectations by 16%, driven by realization improvement and lower than expected volume decline. Due to commodity inflation and a lag in price hikes, the UCP segment’s margins saw a steep decline both qoq and yoy. Weak order inflows led to a 35% yoy decline in EMPS revenues, missing estimates by 24%. EMPS margins, however, improved on better execution and order completion. Gross margins expanded by 239bps yoy on a better revenue mix, resulting in an 18% EBITDA beat. PAT fell by 25% yoy to Rs966mn due to Volt-Bek’s elevated losses and lower other income.

* Outlook: Given the significantly high base in Q4FY21 and weak demand in Q3 due to extended winters, hopes are now pinned on Jan-Jun’22 demand for RACs. Delayed price hikes and elevated commodity prices should continue to impact UCP’s operating performance for the near term. In our view, heightened competitive intensity has halted the company’s market share expansion on YTD basis (till Nov’21) vs. FY21. We expect Voltas to gradually expand its market share in the next two quarters (peak season). Above stated factors have impacted VoltBeko’s performance as well, which is leading to higher loss estimate for FY22- 23E. For the projects business, order inflows are expected to improve in the upcoming quarters and management is also targeting to maintain at least 4.4% EBIT margins (achieved in 9MFY22) going forward. Key risks: faster-than-anticipated market share gains in RACs; better-than-estimated performance of Volt-Bek; weakness in order inflows and execution in the projects business; sustained commodity inflation; and a macroeconomic slowdown.

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